February Market Turbulence – Causes and Outlook

Following an extremely strong 2017 and commencing 2018 with one of the best monthly starts for years, share markets around the world sold off suddenly over early-to-mid-February.  The cause of this was a result of continued positive economic news released in the US, with unemployment and wage growth surprising investors with much stronger than expected improvements. This prompted many investors to re-think whether the US central bank (the Federal Reserve) would need to increase interest rates much quicker than expected to prevent the potential of inflation getting out of hand in the future. If interest rates and therefore bonds increase their rates more than expected, investors need to look at the price they are willing to pay for bonds versus the price they pay for shares. The re-examination resulted in a number of investors selling  their shares.

Given global markets have performed so well for so long, with very little volatility, it was anticipated that markets may reduce some of the very strong gains accrued over the past 14+ months. Looking forward solid growth around the world is anticipated to continue as economies across Europe, Asia and the Americas remain very strong, however given many share markets have risen notably, investors are likely to review the price they are willing to pay for a company’s shares as inflation and interest rates increase. As a result, our expectation is for global share markets to continue to perform well, but greater ups and downs will be experienced over the short-medium term as investors continue to evaluate the share price as interest rates around the world are adjusted upwards.

As always, a well-diversified portfolio with a broad mix of assets will help protect investments though the ups and downs.

January Summary

• The Global shares index returned 3.9% in January extending the run of positive results to start the year with the highest monthly return in more than two years. Emerging markets were even stronger, posting a 6.8% return in January. Most major markets posted double digit returns with India the laggard with a 4.2% return
• In the US, The S&P500 increased by 5.6%. The introduction of the Tax Cuts and Jobs Act which will see US corporate tax rates cut to 21% from 35% together with a raft of positive earnings announcements were the main drivers of strength offsetting any negativity from the temporary government shutdown.
• Following a weak end to 2017, European markets rebounded in January. Italy, which was hardest hit in December, recorded a 7.6% return in January while Germany (+2.1%) and France (+3.2%) also posted solid returns. Survey indicators suggest both consumers and business continue to increase in confidence, in line with improving economic activity – particularly the fall in the unemployment rate which hit 8.7% in December.
• The Australian dollar continued to rise in January and broke through the US$0.80 barrier to end the month at US$0.8057. Further gains in commodity prices were the most likely reason for the $A’s rise although iron ore prices remained largely unchanged in the month at US$73 per tonne following a strong rise late in 2017.
• Despite improving business and consumer sentiment (now at its highest since late 2013), the Australian share market started the year on a negative note falling by 0.4% over the month. The Resources sector returned 0.8% while Industrials saw a negative return of 0.7%. Small caps also suffered fatigue after their strong showing in 2017 falling by 0.5%. The abovementioned rise in the Australian dollar also contributed to this, as our dollar rose to became more expensive for overseas investors who also withdraw some of their investments.
• As the yield received from bonds has started to increase, some investors have sought these more defensive assets rather than property (both locally and internationally). As a result Australian listed property was down 3.3%, whilst Global listed property was down 1.2%.

Compiled with BT Applied Research Monthly Commentary – January 2018

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